In July 2015, the Joint Comprehensive Plan of Action ("JCPOA") was agreed by the United States of America ("US"), European Union ("EU"), United Kingdom, France, Germany, Russia, China and Iran.
It was implemented on 16 January 2016, after the International Atomic Energy Agency verified Iran had satisfied a number of obligations concerning nuclear disengagement. Given this recent development towards re-engagement with Iran, this article briefly identifies which sanctions have been lifted, discusses the common types of business entities through which a foreign company might do business in Iran (beyond the 'fly in, fly out' model) and explores some related legal and practical considerations.
The intention of the JCPOA is to ensure a peaceful Iranian nuclear program, whilst providing sanctions relief. Specifically, all UN, most EU nuclear-related economic and financial, and some US ('secondary') sanctions were lifted. This included the unfreezing of assets for 331 Iranian entities and individuals subject to previous EU sanctions, the lifting of 'secondary' sanctions imposed on non-US persons (in most cases) and the lifting of 'primary' sanctions imposed on US persons in certain cases, for example the sale of aircraft and related services. Notwithstanding the sanctions relief, many non-US persons, in particular banking institutions with any link to the US, have been very cautious in re-engaging with Iran. Additionally, the fact that UN sanctions will 'snap back' if Iran fails to comply with material terms of the JCPOA in the future has further led to some hesitance.
Unlike the majority of the member states of the GCC, Iran permits 100% foreign ownership of companies in many industries. However, only minority ownership is permitted in some industries, such as banking, insurance and airport services, and foreign ownership is not permitted at all in certain industries such as telecommunications, utilities and energy. Generally, the requirement to obtain additional licenses and consents to set up is lighter touch in Iran than throughout the GCC.
The most common types of business entities in Iran are limited liability companies (LLCs), private joint stock companies (PrJSCs) and branch offices. The liability of the shareholders of LLCs and PrJSCs is generally limited to their share capital contributions. However, if a LLC's name contains the name of a shareholder, that shareholder's liability for the LLC's debts is unlimited. The liability of a 'parent' company for its branch office in Iran is also unlimited. In all three cases, local land ownership is permitted and the corporate tax rate is set at 25 percent. For LLCs and PrJSCs, the initial share capital required is 1 million Iranian Rials (approximately 32 United States Dollars!). All three types of entity generally take between two to three months to establish. Iran also has seven Free Trade Zones and 17 Special Economic Zones, offering customs duties and tax exemptions.
There are many practical considerations in relation to setting up in Iran. The various sanctions regimes have crippled the country over the years. Accordingly, Iran requires significant foreign investment and technology transfer to compete globally in most industries. This presents opportunities to share in Iran's development but also creates risks such as intellectual property infringement. Specific legal advice should be sought as to how to protect exported technology and technical 'know how'.
Careful and ongoing due diligence is also required to ensure compliance with remaining sanctions. This is particularly the case for US persons and non-US persons with US affiliates, offices, directors or employees. How the risk of 'snap back' of UN sanctions, or the reversal of the lifting of EU or US sanctions, is addressed in documentation (such as including appropriate representations, warranties, termination rights and remedies) is another factor which must be carefully considered.
As mentioned above, Iran needs foreign investment and, despite assurances given by US Secretary of State John Kerry, the banking sector remains cautious of funding such investment. This is because of ambiguity regarding the risk of heavy fines still being imposed by the US Department of Justice, even on non-US banks. There is ongoing dialog between the US and the global banking sector which is expected to resolve this uncertainty. In anticipation, a number of foreign banks have recently established branch or representative offices in Iran.
The implementation of the JCPOA and the lifting of sanctions are important steps towards global re-engagement with Iran. Notwithstanding some of the remaining challenges, the comparative ease of setting up in Iran, coupled with its investment potential, presents many opportunities for the global business community. Provided vigilance is ongoing and appropriate legal advice is sought, the potential of doing business in Iran is great.
Head of Corporate - Oman
Oliver is a Partner and head of our Oman corporate practice. Oliver has over fourteen years’ experience of advising clients on the legal aspects of regional and international mergers and acquisitions, joint ventures, private equity investments and general corporate governance and compliance matters. His clients include a number of international blue-chip organisations from a wide variety of sectors.